{"id":87366,"date":"2026-02-12T11:19:55","date_gmt":"2026-02-12T05:49:55","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=87366"},"modified":"2026-02-13T11:35:45","modified_gmt":"2026-02-13T06:05:45","slug":"16th-finance-commission","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/16th-finance-commission\/","title":{"rendered":"16th Finance Commission and Centre-State Fiscal Relations"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><strong>Finance Commission Latest News<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The 16th <\/span><strong><a href=\"https:\/\/vajiramandravi.com\/upsc-exam\/finance-commission\/\" target=\"_blank\">Finance Commission<\/a><\/strong><span style=\"font-weight: 400;\"> has submitted its report for 2026-31, and the Union government has accepted its recommendations on tax devolution to States.\u00a0<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Constitutional Framework of Fiscal Federalism<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s fiscal federal structure is anchored in <\/span><b>Article 270<\/b><span style=\"font-weight: 400;\"> and <\/span><b>Article 280<\/b><span style=\"font-weight: 400;\"> of the Constitution.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Article 270 provides for the distribution of net tax proceeds between the Centre and the States.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Article 280 mandates the constitution of a Finance Commission every five years to recommend how this distribution should take place.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The taxes shared between the Centre and States include:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Corporation Tax<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Personal Income Tax<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Central Goods and Services Tax (CGST)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Centre\u2019s share of Integrated GST (IGST)<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, <\/span><b>cess and surcharge<\/b><span style=\"font-weight: 400;\"> levied by the Centre are excluded from the divisible pool.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The divisible pool forms about 81% of the Centre\u2019s gross tax revenue for 2025-26 after excluding cess and surcharge.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This distinction has been central to debates on fiscal equity and resource adequacy for States.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Evolution of Vertical Devolution<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Vertical devolution refers to the share of States in the divisible pool of central taxes.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Till the 13th Finance Commission (2010-15):<\/b><span style=\"font-weight: 400;\"> States received 32% of the divisible pool, along with conditional transfers under Centrally Sponsored Schemes (CSS).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>14th Finance Commission (2015-20):<\/b><span style=\"font-weight: 400;\"> Vertical devolution was significantly increased to 42%, and many tied CSS transfers were rationalised.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>15th Finance Commission (2020-26):<\/b><span style=\"font-weight: 400;\"> The share was reduced to 41% after the reorganisation of Jammu and Kashmir into two Union Territories.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This marked a structural shift toward greater untied fiscal autonomy for States.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Horizontal Devolution Criteria<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Horizontal devolution refers to how the States\u2019 share is distributed among individual States.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Since the 13th Finance Commission, the criteria have broadly emphasised:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Equity (Income Distance)<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Population and Area (Needs-based factors)<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Efficiency factors<\/b><span style=\"font-weight: 400;\"> such as forest cover, demographic performance, and tax effort<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This has led to persistent debates between economically advanced and less-developed States.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>States\u2019 Key Demands Before the 16th Finance Commission<\/strong><\/h2>\n<ul>\n<li><b>Demands on Vertical Devolution <\/b><span style=\"font-weight: 400;\">&#8211;<\/span> <span style=\"font-weight: 400;\">Many States sought an increase in vertical devolution:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">18 States demanded raising the share from 41% to 50%.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Some others sought 45-48%.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">Several States demanded inclusion of cess and surcharge in the divisible pool and a cap on their imposition.\u00a0<\/span><\/li>\n<li><b>Demands on Horizontal Devolution<\/b><span style=\"font-weight: 400;\">:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Many States wanted equity parameters to retain dominance.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Some recommend reducing the weight of \u201cincome distance\u201d.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">Industrialised States such as Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Telangana demanded inclusion of States\u2019 contribution to GDP as a criterion.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">These demands reflected the tension between redistribution and reward for performance.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: left;\"><strong>Recommendations of the 16th Finance Commission<\/strong><\/h2>\n<ul>\n<li aria-level=\"1\"><b>On Vertical Devolution<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">The Commission rejected the proposal to cap or include cess and surcharge in the divisible pool, stating that under the present constitutional scheme, it is neither permissible nor desirable. These instruments may be required for exigencies.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">It retained the States\u2019 share at <\/span><b>41%<\/b><span style=\"font-weight: 400;\">, citing three reasons:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">States already receive a substantial share of total tax revenues.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Much of Union spending under CSS is routed to the States.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The Union requires higher resources for defence and infrastructure.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">Thus, there is no major change in vertical devolution.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>On Horizontal Devolution<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">The Commission adopted two guiding principles:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Changes in States\u2019 shares should be gradual.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Efficiency and growth contributions should receive due recognition.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Accordingly, a <\/span><b>new criterion of States\u2019 contribution to GDP<\/b><span style=\"font-weight: 400;\"> has been introduced. The weight assigned ensures a directional shift without drastic redistribution.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">As a result:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Southern and western States have seen a marginal increase in their share.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Large northern and central States have seen a marginal decrease.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">Overall, the outcome represents a calibrated shift toward efficiency while maintaining redistributive balance.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Broader Fiscal Observations<\/strong><\/h2>\n<ul>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission made several important observations:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The Centre should progressively reduce reliance on cess and surcharge.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">States should make subsidies more efficient and targeted.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Power sector reforms must be actively pursued.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">States need to control fiscal deficits and debt levels.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Both the Centre and States should undertake public sector enterprise reforms.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These recommendations reflect concerns over fiscal sustainability and cooperative federalism.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <strong><a href=\"https:\/\/www.thehindu.com\/news\/national\/have-states-gained-from-the-16th-fc-explained\/article70621192.ece#:~:text=Considering%20all%20the%20above%20factors,central%20States%20has%20marginally%20decreased.\" target=\"_blank\" rel=\"nofollow noopener\">TH<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The 16th Finance Commission has retained 41% vertical devolution while introducing GDP contribution as a new criterion.<\/p>\n","protected":false},"author":21,"featured_media":87373,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[5342,60,22,59],"class_list":{"0":"post-87366","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-finance-commission","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/87366","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/21"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=87366"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/87366\/revisions"}],"predecessor-version":[{"id":87541,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/87366\/revisions\/87541"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/87373"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=87366"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=87366"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=87366"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}